5. Corporate governance

The management of Demo You Inc. controls 58% of the companys stock. The firm did not meet any of its quarterly sales projections for the last year. Some of the firms institutional investors are worried that the firms poor performance is partly because management has not been focused on maximizing shareholder wealth. Which of the following measures would the institutional investors most likely want to see implemented?

They would like to see the size of the board of directors increased, because larger boards usually implement a higher degree of corporate governance.

They would like to see that the majority of the companys board of directors is composed of true outsiders.

They would like to see that the company has an interlocking board of directors with one of the companys strategic partners.

It is reasonable to assume that a firms management is going to be ultimately motivated to act in their own best interest. It can be a serious problem for shareholders if managements self-interests do not align with shareholders self-interests. Select the statement that best describes the board of directors actions in the following scenario:

Kulatsu Motors Co.s board of directors has decided to buy back 200,000 shares of the companys stock on the open market. The board believes that this stock repurchase will increase the firms earnings per share.

The boards decision will help align managements interests with the shareholders interests.

The boards decision will give management the incentive to make decisions that are not in the shareholders best interest.

A stock repurchase will not have an effect on the relationship between managers and shareholders.